GST Impact on the Infrastructure Sector in India

GST Impact on the Infrastructure Sector in India

On the commencement of the long journey to implement the historic GST regime, it is worthwhile to take stock of how it impacts specific aspects of Indian infrastructure. Here are seven ways GST affects the sector – three positive, and four negative.

Electricity

Works contracts and EPC

Cement

Logistics

Advisory, consulting, engineering and project management services

Abolition of tax holidays and exemptions

Civil aviation

A. Electricity

Power producing companies – both renewable and conventional – would have to pay GST for their inputs such as fuel and machinery but will not be able to get these taxes refunded, given that their output – electricity – is exempt. This higher cost of producing electricity will then be passed on to consumers under the “change of law” clause in power purchase agreements (PPA). Developers selling electricity in the spot market or on a non-PPA basis would have to factor in the higher cost.

B. Works contracts and EPC

GST seeks to provide much-needed clarity on works contracts, and therefore, on the engineering, procurement and construction (EPC) business line. Works contracts are proposed to be taxed as “services”. This means the GST rate and provisions, like place of supply rules etc, as applicable on services will apply to works contracts. The major gain from this treatment is that the tax would be now charged on the actual contractual base. Also, local versus inter-state works contracts that at present leads to innumerable disputes should get eliminated.

C. Cement

Cement is a crucial input to the infra sector, and GST is expected to impact it positively. The overall indirect tax incidence is currently estimated to be around 25 per cent. The cement industry is also expected to benefit from lower costs of logistics. Overall, a decrease in cement prices is expected.

D. Logistics

The GST is expected to enable a reduction in logistics cost by as much as 20 per cent to 30 per cent, as firms reconfigure their supply chains. Reduction in waiting and idling time at inter-state barriers and checkpoints is expected to provide a huge relief.

E. Advisory, consulting, engineering and project management services

As with all other services, firms providing these services to the infrastructure sector will have a negative impact due to the higher incidence of GST at 17 to 18 per cent vis-à-vis the current 15 per cent.

F. Abolition of tax holidays and exemptions

There are different tax holidays and exemptions for infrastructure development and operations at both the central and state levels. Whilst there is the hope that in the final analysis, these tax holidays and exemptions will be allowed to run their course, the lurking fear is that they will be removed.

G. Civil aviation

Five petroleum products – crude, natural gas, aviation turbine fuel (ATF), diesel and petrol – are excluded from the coverage of GST for the initial years while the remaining petroleum products – kerosene, naptha and liquefied petroleum gas (LPG) – are covered. Flight tickets are likely to get costlier as airlines will not be able to claim credit on tax paid on jet fuel. Currently, airlines can claim what is called a cenvat credit on the central excise duty for fuel. They stand to lose this in the GST regime as ATF is outside the purview of GST.